Financial Institutions: Managing Your Money Wisely

1. Chapter 19 Personal Financial Literacy

2. Lesson 1 - Financial Institutions and Your Money • Essential Question….. • How can financial institutions help you increase and better manage your money? • When you turned sixteen, your parents promised that you could get an after-school job to start earning your own money. You have worked at this job, getting regular paychecks for three months. You plan to use the money you earn from this job to buy a used car, but your salary is not high enough to save enough money by the target date of the start of your junior year in high school…..

3. Lesson 1 - Financial Institutions and Your Money • Which of the following methods do you think is the best way to put your money to work for you? Why? • Keep all of your money in a shoebox in your closet. Promise yourself that you won’t spend any money on other things until you reach your goal. • Put your money in a bank savings account. It’ll earn some interest and you can withdraw what you need at any point. • Place your earnings in a certificate of deposit account. It’ll raise higher interest, but you will be limited in the flexibility of withdrawing funds.

4. Focus Question…… • What is the value of learning how to properly budget your money?

5. Budgeting Your Money • What in your life is influenced by money? • Where you live • How you get around • Free time • Your job • How do you find out where your money goes? • List your bills • One month – list everything you buy…include price no matter the cost

6. Financial Institutions • What is a financial institution? • An organization that channels money to investors • Accomplished by “selling” your money to investors • Money you earn is known as interest…money paid to you for them keeping it in an account • How much = interest rate • F.I loans some of your money to other institutions at a higher interest rate & they keep profit • Interest rates determined by the Fed

7. Financial Institutions • Various financial institution? • Commercial Banks • Most common and safest • Day-to-day banking for consumers • Federal Deposit Insurance Company • Insures up to $250,000

8. Slide Title • Turn & Talk • How do banks help customers manage day-to-day transaction needs?

9. Financial Institutions • Various financial institution? • Credit Unions • Usually not-for-profit • Specific groups of people • School districts • State employees • Other large groups • Offering • Lower fees • Low interest rates • Loans……

10. Financial Institutions • Various financial institution? • Nonbank Financial Institutions • Finance companies • Vehicles, appliances, etc. • Life Insurance companies • Lend surplus funds • Investment banks • Buy and sell securities • Stocks and bonds

11. The Importance of Saving • Why start saving now? • Saved money grows • Based on simple or compound interest • Simple Interest – interest based only on original amount • Compound Interest – Interest based on original amount plus interest earned

12. The Importance of Saving • Simple/Compound Interest Examples

13. The Importance of Saving • Compound vs. simple interest • Over time, compound will give you more return on your investment • Secret is to NOT TOUCH IT!!!!!!!

14. The Importance of Saving • How to open an account • Some decide to go to the bank their parents use • might choose a bank because it’s convenient or has a good reputation • Questions you should ask: • Does it require a minimum balance? Some banks charge you a fee if you do not keep a certain dollar amount in your account; other banks do not. • What are the fees? It’s good to know up front what services you will and won’t be charged for. • What interest rates does the bank offer? Even though the Fed determines the initial interest rate, banks have the ability to offer a particular range for various accounts.

15. Savings Vehicles and Risk vs. Returns • Your goals should determine which savings methods you choose • Passbook Account • Most common • usually allows a low minimum balance • ideal for “emergency funds” • Fixed interest rate – very low

16. Savings Vehicles and Risk vs. Returns • Money Market Deposit Account • These accounts pay slightly higher interest because they have various deposit requirements • usually requiring a higher minimum balance • Interest rate can vary with the market

17. Savings Vehicles and Risk vs. Returns • Money Market Mutual Fund • Relatively low risk • deposits are invested in a pool in short-term financial vehicles • 90 days to 13 months • Interest rates on these accounts are comparable to money market deposit accounts.

18. Savings Vehicles and Risk vs. Returns • Certificate of Deposit (CD) • higher interest rates than a traditional savings account. • Depositors “purchase” a CD of a certain amount ($100, $1,000, $5,000, $10,000, etc.) • Fixed interest rate (3.5%, 5%, etc.) • Set time period (1 year, 18 months, etc.)

19. Checking Accounts • A checking account is a demand deposit account (DDA).  • Allows customers the easiest access to their money for daily and monthly use. • Can access their money by walking into the bank and filling out a deposit or withdrawal slip, by writing a check, or by using a debit card

20. Checking Accounts • A checking account is a demand deposit account (DDA).  • Ways to deposit money into your checking account include: • Go to the bank, endorse checks (personal checks or paychecks) by signing your name to the back of them, fill out a deposit slip, and hand to a teller. • Put endorsed checks and a deposit slip into an ATM. Tellers will make the deposit during banking hours. • Transfer funds from a savings or other account to your checking account online.

21. Checking Accounts • A checking account is a demand deposit account (DDA).  • Ways to access the money in your checking account include: • Write a paper check (or read numbers from a paper check to a vendor over the phone).  • Go to the bank, fill out a withdrawal slip, and receive cash from a teller. • Pay bills with a bill-paying service through your bank online.

22. You as a borrower • Our society depends more and more on credit, or borrowing, to pay for purchases, which is why it is important to establish and then maintain good credit. • Paying cash for everything does not make you a good credit risk. • To prove you’re responsible enough to get credit, you have to establish a credit history and a credit score • About 15% of a credit score is based on how long you’ve had credit, so it’s important to establish credit as soon as possible.

23. Are You Creditworthy? • What do creditors look at???? • Can you pay them back? • Add your monthly income to your bank account balances to find your total assets. Then total your monthly expenses, including debts or obligations • Do you have good credit rating? • repaid previous debts on time. • Do you have collateral? • Collateral is used mostly to buy homes or cars. If you don’t make the payments, the lender takes back the house or car.

24. Credit Cards • When you use a credit card, you’re borrowing money from a creditor that must be paid back—plus interest • credit card companies set a low “minimum monthly payment” amount • The longer it takes you to pay off your balance, the more they are able to charge • charge compounding interest that is much higher (15% to 25%). • do not fall into the credit card trap of paying only the minimum payment.

25. Building Credit and Your Credit Score • Every time you buy something with a credit card or pay a bill, your activity is being recorded by a credit bureau • Issues a credit rating • Equifax, Experian, and TransUnion. • 3companies that issue ratings • Your credit score is a number between 300 and 900

26. Building Credit and Your Credit Score • So how do you build credit and improve your credit score? • Open an account in a bank or credit union, which builds a relationship with the financial institution. • Apply for a secured credit card at the bank or credit union. (pay in advance and you can use up to the amount paid) • Apply for a retail store credit card • Get a job and keep it • Be sure to pay service providers (cell phone, Internet, electric company, etc.) on time. The history of your payments to them often appears on credit reports—especially if you pay late.

27. Declaring Bankruptcy • If you have trouble repaying a loan, there are things you can do to get help. • Contact your creditor right away • Credit counselors and other services also are available • There may come a time when income cannot keep up with the accumulation of monthly bills • A person can “declare” bankruptcy by filing a petition with the courts. • It should be the option of last resort.

28. Two Types of Bankruptcy • Chapter 7 • most common form of bankruptcy • A trustee from the court is appointed to evaluate the debtor’s assets and use them to pay a portion of the debt. Money owed on student loans, child support, and taxes will not be dismissed, however. Those with lower incomes and few assets typically choose this option. • Chapter 13

29. Two Types of Bankruptcy • Chapter 13 • allows the debtor to keep some or all of his or her property. • A trustee is appointed to create an appropriate repayment plan with lowered payments. • The court collects future payments from the debtor to pass onto creditors. *After the debtor has completed the requirements spelled out by the court, he or she is relieved of the debt previously accumulated.

30. Turn & Talk If Bankruptcy is so hard to recover from, why would any family, business, or individual ever even consider bankruptcy an option?

31. Lesson 2 – Business Organizations and Your Money • Essential Question….. • What are the different types of business organizations?

32. Business Organization and Ownership • We all at some point transfer our hard earned money to businesses and government • Investments and loans. • Called Capital Formation • Benefits everyone • Financial institutions turn the collective savings of all their customers into investments that result in more jobs, which result in more goods and services being produced

33. Business Organization and Ownership • Sole Proprietorships • business owned by one person • To get started, the owner needs to obtain all of the required permits, registrations, and licenses, which vary depending on the state • Advantages • easy and often inexpensive to set up • All of the decisions are made by one person, who gets all of the profits. • Disadvantages • holds unlimited liability for debt and other obligations • difficult to raise money from investors • Limited life

34. Business Organization and Ownership • Partnerships • business owned by two or more people • Together, they divide all profits, and they are responsible for all debts. • Three Types • General Partnership  - management of the business, liability, and profits are split equally among partners. • Joint Venture  - is typically set up for a single project or for a limited time span • limited partnership - allows for certain partners to have less input—less money invested or fewer decision-making powers

35. Business Organization and Ownership • Advantages • easy to form • utilize the resources and strengths of the partners • Disadvantages • struggles that occur whenever people work together. • disputes over the direction of the company, day-to-day duties, and the amount of effort • Everyone accountable

36. Business Organization and Ownership • Corporations • business that is legally separate from its owners • made up ofstockholders (shareholders) who invest money and, in return, receive profits that the corporation earns. • Setting up a corporation requires a number of complicated and costly legal prerequisites.

37. Business Organization and Ownership • Advantages • It provides limited liability, meaning that the corporation itself, not its owners, is fully responsible for its obligations. • Shareholders are not responsible for the debts of a corporation • Corporations can raise money for the business, including offering stock, which can be a way to recruit high-quality employees.

38. Business Organization and Ownership • Disadvantages • Start-up costs can be very high • recordkeeping and other obligations can be burdensome and time consuming.

39. Business Organization and Ownership • How to Raise Capital • All business organizations face a similar need: obtaining capital to develop their business. • corporations have several options unavailable to sole proprietorships and partnerships.

40. Business Organization and Ownership • How to Raise Capital • There are four general ways for corporations to raise capital: selling bonds, issuing stocks, borrowing directly from financial institutions, and converting profits. • Selling Bonds • A corporation offers bonds for sale, and then pays installments of interest to the bondholders • Low risk for investors • corporations must pay bondholders even if the company has not made a profit • Issuing Stocks

41. Business Organization and Ownership • How to Raise Capital • Issuing Stocks • purchasers of stock receive dividends representing a portion of corporate profits. • 2 types • Preferred – No say in how company is run • Common Stock – Do have a say • Borrowing Directly • Businesses can get loans from banks or other lenders. • interest rates typically are higher than those for bonds and stocks.

42. Business Organization and Ownership • How to Raise Capital • There are four general ways for corporations to raise capital: selling bonds, issuing stocks, borrowing directly from financial institutions, and converting profits. • Issuing Stocks • purchasers of stock receive dividends representing a portion of corporate profits. • 2 types • Preferred – No say in how company is run • Common Stock – Do have a say